Brief China Economic Update – 9 August 2013

Partial economic indicators, although still subdued, provided some signs that the economy may now be stabilising. Trade data came in somewhat above expectations, including much stronger import growth pointing to a pick up in domestic demand.

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Partial economic indicators, although still subdued, provided some signs that the economy may now be stabilising. Trade data came in somewhat above expectations, including much stronger import growth pointing to a pick up in domestic demand. This was consistent with slight improvements in other partial indicators such as industrial production and business investment, although retail sales growth eased – potentially discouraging to rebalancing efforts. These outcomes are in line with our expectation for China’s growth to stabilise in the second half of 2013 at relatively subdued levels as authorities press on with structural rebalancing efforts – partially offset by an improvement in export demand from major developed economies and a variety of policy fine tuning measures. Nevertheless, signs of improvement in the global economy (not just China’s) remain tentative and a further deceleration of growth can not be ruled out.

While last month we highlighted the apparent grey area surrounding China’s growth target the leadership have subsequently provided some clarity by confirming the target of 7½% this year, while implying a floor of 7% – the rate necessary to achieve prosperity goals by 2020 and maintain stable employment. We have maintained our forecast of 7.5% growth for 2013, decelerating to 7¼% next year. Regarding the monetary policy outlook, the ‘wait and see’ approach taken by policy makers to date is likely to continue despite relatively benign inflation providing scope for further loosening – a reflection of concerns over speculative financial activity and asset bubbles.

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